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July 25, 2011

Why Financial Education Is Now an Advisor’s Best Friend

I always love hearing from readers, especially those that pose a provocative rebuttal to something I’ve written about. In my last AdvisorOne column, Advisors’ Missed Opportunities With a Key Client Group: Women, I proposed that by educating female clients on important financial planning and investing concepts, advisors could open an untapped market of investors.

We received an email from an advisor who felt that taking the time to educate clients was neither cost effective nor beneficial to an advisor’s business if it required their own time and efforts. He made a strong case, based on an ROI study in the article on the correlation between financial education and 401(k) plan participation rates, which found that with more education interactions, employees increased their retirement plan deferral rates. So I decided to address his concern because I think the point he is making is a game-changer for advisors.

With increasing challenges due to the economy and increased client skepticism, a lot of old paradigms need to change. One is regarding financial education. The advisor community used to be split on financial education: one camp adamant that they needed to become the sole source of financial information and education for their clients in order to maintain a strong relationship; the other camp believing financial education is a waste of time and ignoring it altogether.

In our experience, both camps are wrong. In today’s world, education is more necessary than ever to solve our economic crisis and get consumers to save and accumulate more investable assets so that planners have a greater pool of potential clients. It is also necessary as a means to educate the clients about the importance of financial planning, an issue the CFP Board, for instance, knows all too well. After having studied this issue extensively, the Board ultimately decided the best way they could serve their membership was to initiate a nationwide, multimillion dollar campaign to help solve the trust gap and educate consumers about how a financial planner can help them grow their wealth.

But just because financial education is necessary doesn’t mean that advisors need to provide it themselves. Indeed, many advisors simply can’t afford to spend their time on education, when they are already spending long hours trying to attract clients with investable assets, only to find the pool is shrinking due to economic challenges and consumer distrust of the financial services industry.

Before going any further, please know that Financial Finesse is a financial education firm, and as the founder and CEO, I obviously have a bias towards financial education. In fact, my strong passion for education is the reason I started this business in the first place. That said, we do not sell any financial services to advisors, nor do we sell any of our education services to employees. See page three of this article for a fuller disclosure.

Solving the (Potential) Client Education Gap, Profitably So what’s an advisor to do? Read this exchange with a reader of this column to learn about a third way to get education to clients so advisors can reap the rewards without wasting valuable time that they

need to dedicate towards attracting and retaining clients and meeting their own income goals.

Q: It doesn’t appear that the cost [or providing education] can be justified by increased employee contributions alone. A plan participant who goes from $3,000 of contributions to $6,000 of contributions after five hours of educational interactions is probably generating an additional $30 in advisor fees, at most. This bills out at approx $6 an hour. Advisor feasibility must stem from plan retention and ancillary business that arises from these interactions. Mining those numbers would not be easy.

A: I couldn’t agree more, though as the reader acknowledged, this analysis does not include the compounding of these contributions over time and fees generated from this compounding. Even considering this, for advisors who need to increase income today, spending time to educate your clients simply for the sake of educating them is not a lucrative proposition for most advisors. Although it does effect behavioral change—92% of financial education participants report making three major financial changes within 30 days, including cutting expenses, reducing debts, and increasing savings—you know the work you do in the short term will only benefit you if participants sustain these behavioral changes over the long term, and only if you retain the management of their assets. The work/reward ratio is very high.

That said, there’s one dynamic this analysis is missing:

What if someone else was spending the hours educating your clients but you reaped the rewards? Would you turn down the $6 per hour if you weren’t spending that hour of your time? Imagine this on a large scale. You are the broker of record on a retirement plan where deferral rates increased each year financial education was provided (based on internal research, the median increase in elective deferrals among employees who received regular education was 3%). Depending on the size of the company, that could translate into thousands of dollars of extra income with no additional work on your part. Profit margins don’t get better than that.

Now what if the company delivering the education did so in partnership with you, at no cost to you, and with no competitive agenda? In other words, the company was a full-time education firm that generates 100% of its revenue from the sale of financial education programs to companies, with no assets under management, no financial services to sell and no advice to offer to individual employees?

The good news is this is no longer a “what if” scenario. Financial education is now an industry and a key employee benefit for many large- and medium-sized companies (including our firm, see disclosure below). Even better, it is entirely compatible with financial advice,

provided the firm is an education-only firm and doesn’t sell any financial products, services or advice to individual employees. Advisors today can (and I would argue they need to) support the growth of this industry in order to reap the benefits of having a free partnership that increases their assets under management.

This is something advisors need to think about as they look for ways to leverage their time and increase their income in a difficult economy. It might just be the answer to a lot of the challenges advisors are facing today.

FULL DISCLOSURE: We are a financial education firm, and as the founder and CEO of Financial Finesse, I obviously have a bias towards financial education. In fact, my strong passion for education is the reason I started this business in the first place. That said, we do not sell any financial services to advisors, nor do we sell any of our education services to employees. One-hundred percent of our revenue comes from the sale of large-scale financial education programs to large- and medium-sized companies. It is in this capacity that we partner with retirement plan providers and financial advisors who work with the companies to increase retirement plan deferral rates. We have an interest in ensuring those partnerships operate smoothly because employers need to see results in order to continue to use our financial education.

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